Farfetch Limited (NYSE:FTCH) Q1 2023 Earnings Call Transcript

Farfetch Limited (NYSE:FTCH) Q1 2023 Earnings Call Transcript May 18, 2023

Farfetch Limited beats earnings expectations. Reported EPS is $-0.37, expectations were $-0.42.

Operator: Good afternoon, and welcome to Farfetch Q1 2023 Results Conference Call. My name is Leila and I will be your conference operator today. . Thank you. I’d now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.

Alice Ryder: Hello, and welcome to Farfetch’s first quarter 2023 conference call. Joining me today to discuss our results are José Neves, our Founder, Chairman and Chief Executive Officer; Elliot Jordan, our Chief Financial Officer; and Stephanie Phair, our Group President. Please note that in this otherwise stated all comparisons on this call will be on a year-over-year basis. During today’s call, we will also be displaying a slide presentation throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestors.com. Following the call, the slide presentation will also be uploaded to the site. Before we begin, we would like to remind you that our discussions today will include forward-looking statements.

Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ, please see the Risk Factors section of our Form 20-F filed with the SEC on March 8, 2023. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release, which is available on our website at farfetchinvestors.com. And now I’d like to turn the call over to José.

José Neves: Hello, everyone. Thank you for joining us today. I’m pleased to report that Farfetch is back to growth. This is despite the continued headwinds from Russia, China and the stronger U.S. dollar with Q1 2023 adjusted revenue up 4% or 13% on a constant currency basis, and adjusted EBITDA margin improving for the first time in five quarters. We had set 2023 to be our year of execution. And I’m delighted that we are absolutely delivering as reflected in our Q1 results as well as recent milestone launches. Our key 2023 launches including Reebok and Ferragamo have either been delivered or remain on schedule for launch later this year, as in the case of Neiman Marcus Group. Additionally, our announced transaction with Richemont continues to advance through the regulatory review process, and our cost reduction and working capital initiatives towards achieving our 2023 profitability, and free cash flow objectives are well on track.

Underlying our Q1 performance is strong execution across our business. I’d like to share with you some recent highlights across our three business pillars marketplaces, platform solutions and brand platform. Within marketplaces, the Farfetch marketplace demonstrated notable progress with underlying growth as measured by other growth x Russia and China accelerating to 18% in Q1, as compared with 12% in Q4 2022. With respect to China, we saw a marked improvement in Q1 Mainland China GMV. While still in decline, it was to a lesser extent than in Q4 2022. And I’m pleased to share that performance has continued to ramp up as we expected, with GMV back to growth quarter to date. I have just spent a week in Mainland China and Hong Kong, and I am very excited by what I witnessed.

Not only does the country seem to be back to normal with a lot of positive energy, it is also clear that the appetite for luxury is very strong. This makes me even more enthusiastic in light of what Farfetch has built in this market. I believe we are the only western companies succeeding at a multi $100 million scale in online luxury in China. In fact, very few Western internet companies have been able to find a strong product market Fit in China. Yet Farfetch, thanks to the unique dynamics of the luxury industry. Our continued investment in localized operations over the past eight years, and an amazing team on the ground has created a very differentiated platform for luxury brands to reach their Chinese customers digitally. China is expected to represent more than 25% of the luxury industry by 2030.

And with Mainland China at less than 10% of our overall business. This means we have significant potential for further growth as our recovery in this market accretes positively to our overall 2023 plans. We are also delighted to see our internationalization efforts pay off in other key luxury markets, including in Latin America, and the Middle East where GMV grew strong double digits in Q1. Turning to the U.S. in Q1 GMV declines as expected, as a result of our reduction of U.S. online marketing investment by more than 20% over the last three quarters in light of the heightened promotional environment, and our increased focused on optimizing for profitability. But we’re pleased to see that we have actually increased the active customer count and others by high single digits, and at U.S. GMV declined to a lesser extent in Q1 than in Q4 2022.

We expect the promotional dynamic will moderate over the course of the year as retailers sell through their inventory positions. And as we start to comp 2022 declines in Q3 and Q4. We expect U.S. to be back to growth in the second half of 2023. And in the wider Americas region, thanks to the significant growth and scale of our Brazilian and Mexican businesses. We deliver positive growth, which shows the power of operating a truly global platform. Something Stephanie will discuss further today. With our second business pillar platform solutions, the teams have been laser focused on supporting our existing clients while also delivering on our 2023 launches. To this end, I’m delighted to report that in Q1, we expanded our relationship with key strategic partner Harrods with FPS launch of harrods.cn providing the iconic retailer with the localized ecommerce channel to cater to a pivotal audience of Chinese luxury consumers.

The platform solutions and brand platform teams have also delivered on planned 2023 launches. We were thrilled to launch the initial ecommerce channel for 360-degree partner Ferragamo in Europe, with U.S. and key international markets launching in the coming months. Additionally, our new brand platform license Reebok went live this month thanks to FPS his launch of the European ecommerce channel and the brand platforms kickoff of wholesale operations. Later this year, we look forward to also launching Bergdorf Goodman as part of our broader partnership with Neiman Marcus Group, which remains on track for H2. And finally, our announced transaction with Richemont continues to progress through the regulatory review process. With approvals now received in markets, including the U.K. and China.

The transaction remains subject to approval from a number of other regulatory authorities around the world with whom we continue to work closely. Our Q1 results reflect our disciplined focus. Based on our performance, we remain on track to deliver on our 2023 plan, which is the first step towards achieving our medium-term targets and our longer-term mission to be the leading global platform for luxury. This represents more than 360 billion opportunity today. With technology at the core of our business, we have consistently led innovation in luxury space, having been chosen to be the long-term innovation partners like companies such as Chanel, Richemont, Kering, Harrods, Neiman Marcus and others. One of the areas we are most excited about is the recent developments that large language models are bringing to the field of AI.

We’re already in the leading position with respect to AI in the luxury industry, with significant in-house data science, AI and machine learning teams. And we have been active in this space for many years now. Our longstanding partnership with Microsoft has opened up the opportunity to access the most advanced version of ChatGPT, and our tech teams have been developing several concrete applications of ChatGPT for the luxury space. I believe this could be a significant development for Farfetch. Our rival range is the reason why our customers choose Farfetch. But large language models open up areas like search and discoverability and storytelling of our brand catalog to provide a much easier to use hyper personalized interface for our luxury customers.

Large language models also offer added potential applications to augment the productivity and quality of providing customer service and creating product descriptions, for example. This is an exciting development in Farfetch’s long history of successes in AI and machine learning. There’s still a lot to be discovered in this field. And along the way, we will always have the customer in mind and the need to provide a truly exceptional luxury experience. I am very excited by the near-term prospects of rolling out consumer facing applications of these new AI developments. And I look forward to opportunities for Farfetch platform solutions to collaborate with brands in developing AI applications to enhance their own digital channels. With that, I will turn it over to Stephanie.

Stephanie Phair: Thank you, José, and hello everyone. Farfetch has one of the largest, most valuable and broadest audiences in online luxury. In Q1 2023, we added 500,000 new customers’ growing sequentially by 2% to nearly 4 million active consumers even after the roll off of our remaining Russia customers. We continue to focus on engaging and retaining existing customers a fundamental lever in achieving our growth and profitability targets. As a result, we saw double-digit growth in existing customers shopping on the Farfetch marketplace versus Q1 2022 and increased new customer three-month repurchase rates during the period, which is a strong indicator of long-term value. As a marketplace with an extensive range of products, we cater to a broad customer base that represents varying personas and aesthetics, which in turn allows brands to work with Farfetch to market a variety of looks from their collections.

But also, this means we are uniquely positioned to lean into trends as they emerge across multiple customer profiles and respond to customer preferences in pricing and taste. We are truly global and geographically well diversified, as demonstrated by our significant presence across the top 20 countries by luxury spend. Not only are we a key player in these larger markets, but because of our scalable platform model, we are uniquely positioned to serve the global luxury industry. The global nature of our capabilities allows us to tap into a broad base of demand and lean into markets where demand is strong. In Q1, we saw double-digit order growth in more than half of the 190 countries and territories we serve. We have also invested in regions that have not historically been a focus for luxury players, including markets like Mexico and Brazil, which continued to deliver outsized growth relative to other regions on the Farfetch marketplace.

I had the pleasure of witnessing this firsthand during my recent travels to Brazil and Mexico, where our customers enthusiasm and engagement for our brand were clearly evident. And I heard how much they appreciate the fact that we not only have global luxury brands, but also allow them to shop some of their favorite local brands in a single destination. The fact that they see local brands being showcased to a global audience on the Farfetch marketplace also appeals to their national pride and instills an even stronger affinity to the Farfetch brand. I believe our global success is as a result of the high-quality and personalized services provided through our localized approach, which starts with our supply and is carried through all aspects of the customer experience.

This is an approach we have invested behind for several years and have developed a strong presence and strategic relationships with key local players, China being a great example. Our global footprint enables us to remain nimble and shift investments from one region to another in adapting to changes in consumer demand. But where we have a broad customer base, we also and importantly have a very valuable private client customer base, which we service in a very personalized way. Within our global and diverse customer base, we continue to hone-in on our private client. We have private clients, stylists on the ground in many of our key regions, whose understanding of our customers’ cultural values and nuances enables them to deliver highly curated experiences.

This approach has helped grow this attractive Farfetch customer segment, which represents a larger base of demand than many of our competitors’ entire businesses, as the top 1% of our customers generated more than 27% of Farfetch marketplace GMV in 2022. We also continued to expand this valuable consumer tier ahead of our overall consumer base. PC retention remains above 90% and a higher proportion of customers in the gold and platinum tiers of our access loyalty program are upgrading to the next year. Additionally, private client average order values remained above $1,100, which is particularly encouraging given the overall AOV trends. And it is for all of these reasons, our broad and valuable customer base, our regional diversity and our highly engaged and high spending private clients, that our brands and boutiques continue to see Farfetch as a key partner to reach luxury consumers.

The strength and depth of our customer base is extremely compelling to the industry. And as a result, our brands and boutiques are continuing to allocate stock to their Farfetch channel, further improving the offering we have for existing and new consumers are top 20 brands, excluding NGG brands grew available supply by 60%. And now I’ll hand the call over to Elliot to discuss our financial results and outlook.

Elliot Jordan: Thank you, Stephanie, and hello to you all. I’d like to start with the key financial highlights for the quarter. First, Farfetch is back to growth. And our underlying growth accelerated in Q1 ’23 reflected in marketplace order growth, excluding Russia and China, which was 18% up from 12% in q4. Additionally, brand platform GMV grew 15% and adjusted revenue increased 13% both at constant currency. Our reported GMV continued to be impacted by unprecedented macro forces that started in 2022, namely the closure of Russia, COVID restrictions in China and the strong U.S. dollar. Despite these factors, reported GMV was slightly higher than last year, and digital platform order contribution margin remained robust at 32.4%.

SG&A was in line with expectations with a decrease in spend versus Q4 22, a year-on-year reduction in the underlying cost base through our cost rationalization initiatives and incremental investment to support the new FPS and brand platform deals signed in 2022, as previously guided. Finally, as is typical for a Q1 period, there was a use of cash in the quarter, but this year it was favorable compared to both Q1 ’22 and Q1 ’21 reflecting our focus on improving our working capital and overall cash position. Slide 10 shows our P&L results, which reflect a solid quarter. Group GMV was $932 million, a 0.1% increase on a reported basis and up 3.6% on a constant currency basis. This was driven by growth across all three segments on a constant currency basis.

Adjusted revenue was $476 million, up 13% on a constant currency basis, driven by strong brand platform performance and first party growth across the digital platform. Gross profit grew 4.4% to $241 million. GA and technology costs were $218 million, very much in line with the expected position and reflecting underlying cost savings and incremental investment on new 2023 revenue lines and adjusted EBITDA improved slightly year-on-year to minus $35 million. I’d now like to discuss the performance of our segments. The digital platform started the year well, slide 11 shows that digital platform GMV growth, excluding Russia, China, and the impact of FX was circa 10%. Adding back Russia and China growth was plus 2% at a constant currency, the impact of a strong U.S. dollar resulted in reported GMV of $800 million, a reduction of 1% year-on-year.

This makes Q1 ’23, the strongest overall quarter for digital platform growth in four quarters. The strong underlying performance was underpinned by continued robust growth across our marketplace, with the highest sequential active consumer growth across four quarters, reflecting our successful customer acquisition and retention initiatives and an acceleration in order growth excluding Russia and China to 18%. In terms of average order value, we have seen a 10% reduction to $566. driven in part by the currency headwinds incurred as we report in U.S. dollars plus lower underlying average order value due to higher levels of markdown and a shift in consumer demand for items with lower price points. On a regional level for the Farfetch marketplace, the Americas improved quarter-on-quarter, delivering low- single-digit growth year-on-year.

With growth in Mexico and Brazil the highlight, partially offset by continued softness in the U.S. as a result of the promotional environment. We specifically tailored our demand generation expense in this market to drive efficiencies. EMEA improved quarter-on-quarter, with low- double-digit year-on-year growth, excluding Russia supported by continued strength in core European markets, such as France, Italy and Spain, and double-digit growth in the Middle East. And Asia Pacific improved quarter-on-quarter with an improvement in China, albeit still lower year-on-year. As José mentioned, this important market is back to growth in Q2 to-date, in line with the ramp up that we expected for the full year. Turning to revenue with digital platform services revenue grew 8% to $341 million.

This increase was driven by 28% growth in the first party GMV and revenue. First-party GMV represented 22% of digital platform GMV as we continue to trade through our first party inventory holding. In addition, we increased third-party take rate by 90 basis points to 32.9% during the quarter with higher marketplace take rates and FPS . These two factors were partially offset by a reduction in third-party GMV of 7%, reducing third-party digital platform services revenue by 5%. In terms of margins, digital platform order contribution margin was broadly flat at 32.4%. This robust position was achieved as we saw a 16% reduction in our demand generation spend generating 470 basis points of incremental order contribution margin versus Q1 ’22. First-party gross margin of 27.9% as we traded through our inventory holdings, and third-party gross margin of 67% with an impact from additional duties and shipping costs, as well as higher cost per order of logistics through the lower average order values than Q1.

Moving to the brand platform, where we delivered GMV of $110 million, an increase of 10% on a reported basis and 15% on a constant currency basis, reflecting stronger deliveries for our spring summer ’23 collections within the quarter. Brand platform gross profit was $60 million at a 52% gross margin, an increase of 330 basis points versus Q1 ’22, as last year, we increased our inventory provisioning due to warehousing delays. Our operating cost base consisting of G&A and tech expenses was $218 million. This was an overall reduction in Spain versus Q4 ’22. And accounting for a one-time ruble hedging credit last Q1 and the incremental spin associated with the launch of new clients for 2023, we have seen an underlying reduction in spend, versus Q1 ’22.

We remain on track to spend $950 million for 2023 as a whole, which includes underlying savings of 10% versus 2022. Driven by headcount reductions and cost cutting initiatives across the entire cost base. On cash, we closed Q1 with cash and cash equivalents of $486 million, a net decrease of $248 million during the quarter, in line with expectations, given the usual Q1 seasonality of group operations. As I said earlier, the Q1 movement was favorable compared to the equivalent movement in Q1 2021 and Q1 2022, which saw an outflow of cash of $326 million and $425 million, respectively. Compared to Q1 2022, this improvement was a result of a reduction in investment spend, and actions taken to improve our working capital position, including tightening our inventory balances.

We expect each quarter of 2023 to be stronger in terms of use of cash than the equivalent of 2022, due to stronger adjusted EBITDA, reducing our first-party inventory balances, reversing the post-Brexit buildup of our VAT receivables, due in from European governments, which currently stands at over $200 million and expanding our marketplace creditor position as we return to growth. This means we expect to close Q4 ’23 in line with the closing Q4 2022 position. That leads nicely to full year guidance. And I wanted to remind everyone of the guidance we set for 2023, which remains unchanged. We are on track for GMV of circa $4.9 billion, which includes digital platform GMV of circa $4.2 billion and brand platform GMV of circa $0.6 billion. We expect revenue of $2.9 billion up circa 25%.

Stable year-on-year margins including brand platform gross profit margin of 48% to 50% and digital platform order contribution margin of 33% to 35%. Now focusing on cost means we continue to expect SG&A of circa $950 million, and we continue to target adjusted EBITDA margin of 1% to 3%. We also see no change to how that result will be delivered across the remaining quarters of 2023. With Q1 delivered slightly better than expectations, we look towards Q2, which we expect will deliver stronger reported growth at the GMV level. We will be analyzing the Russia and China impact, so these macro factors fall away. We will also start to see contributions from the recent launches of Ferragamo and Reebok both driving GMV and revenue growth. Moving into Q3, the currency related headwinds from 2022 are expected to largely neutralize allowing the strong double-digit underlying growth position to start shining through once again, and further improve our reported GMV and revenue growth.

We also expect to launch our new partnership with Neiman Marcus Group during the second half of the year with most of the incremental impact expected in Q4. Finally, we expect positive adjusted EBITDA to track this stronger top line performance as we navigate through the year. In terms of cash, we expect that the working capital outflow in Q1 will reverse with strong working capital dynamics, particularly in Q4. I’ll now pass back over to José for his closing remarks.

José Neves: Thank you, Elliot. Farfetch is back to growth despite a continuous uncertain macro backdrop by remaining focused on the clear objectives we’ve articulated. Our Q1 results are the first step towards delivering on our plan for 2023, our year of execution. We continue to be focused on driving our three business pillars, and delivering on the deals we signed in 2022, with the recent launches of Ferragamo and Reebok. As we look further out, we’re also focused on achieving our medium- term targets, including the successful completion of our announced transaction with Richemont, our longer-term mission to be the leading global platform for luxury. Farfetch is uniquely positioned to go after this more than $360 billion opportunity.

We have a track record of strong growth over the years. As Farfetch grew at a 25% CAGR or 3x as fast as the industry between 2019 and 2022. I am extremely confident in our ability to continue expanding our reach across this resilient luxury industry, and also on our prospects for delivering sustained profitability, and free cash flow over the coming years. And with that, I’d like to open up for your questions. Thank you.

Q&A Session

Operator: We will now move into our Q&A session. To start, we would like to take our first question. Doug Anmuth from JPM.

Doug Anmuth: and then just more broadly, as we are roughly halfway in some of the new partnerships. And if you could also comment on the sustainability of demand generation leverage that you’re seeing. Thank you.

José Neves: José, here. I’ll cover your broader question first and then touch on U.S. And then I’ll let Stephanie cover the customer and demand generation part of the question. We started 2023 as we roll our execution and really happy with delivering against that. A quarter where we were back to growth and a quarter of acceleration in our top methods both U.S., China but also other benefits. And it was a quarter of launches and key launches, landmark launches, Reebok is live on budget and on schedule. And same with Ferragamo, we’re on track with the Neiman Marcus Group for the second half of this year. And we continue to make progress with Richemont as well. So these make us very, very confident about the rest of 2023 and we’re on track to achieve our guidance back to growth EBITDA profit and positive cash flow.

We’ve also implemented a number of initiatives and we’re very disciplined in terms of the cost side of the business and the fixed cost. As Elliot outlined the underlying business excluding new deals and new partnerships, actually, we saw a reduction in about 10% of the fixed cost base and very disciplined on cash with a Q1 that was a significant improvement over Q1 last year and with the number of actions well on track to end the year with as much cash if not more than what we started. So, all we know, very, very positive dynamics. And just to elaborate a little bit more in terms of U.S. Look in Q3, we shared with you when we noticed that the market was becoming very promotional in the U.S., retailers, luxury retailers, had built inventory levels.

And we were starting to see, a high promotional activity and therefore, we took the decision to prioritize profitability and reduce our demand generation spend to the tune of circa 20%, since then quarter, every quarter. And as expected, we saw a decline in Q1, although we saw an sequential acceleration from q4. And in fact, in terms of customers and others, we are growing in the U.S. So active customers, real high single digits are those real high single digits. And a decrease in GMV is the result of lower AOVs, as the customers are slightly trading down, and taking advantage of the promotional environment elsewhere, and therefore, have become slightly more price sensitive. By the way, we don’t see that with our private client, our private client, AOV has remained at $1,100.

It’s a very large part of our business is almost a third of our business. And we see 90% private clients retention, so that business hasn’t really been affected that much by these dynamics. And now for the second half, we do think there’s a probability of inventories, being more managed by retailers and lower inventories across the industry, less promotional environment. And one thing we know for sure is that the comps will get much easier for us in Q3 and Q4. And that gives us confidence that we’re going to go back to growth in the U.S. And that will also be supported by our broad exposure to other geographies. China is as expected, recovering were actually positive year-on-year quarter-to-date in Q2. And also, I think we’re demonstrating that our very global business and the investment we’ve done in internationalization is paying off.

So the Americas in Q1, for example, actually grew year-on-year in spite of the U.S. decline, that’s a result of businesses that are now at scale and growing at strong double digits in Brazil and Mexico. And Middle East continues to be very strong, Southern Europe continues to be very strong with double-digit growth year-on-year. So as we start competing, we’ve now comped Russia, we will continue to comp China FX, this underlying strength of the business makes us confident for our 2023 numbers that have cost as a still three quarters to go. And we will continue to be very, very focused on execution, and very focused on continuing the disciplined approach to cost and actually leveraging all the strengths we have in terms of the customer base and the incredible platform we’ve built.

And Stephanie, if you want to cover the demand generation question, please.

Stephanie Phair: Yes. Hi, Doug. Stephanie, here. I’m glad you asked about the demand generation leverage because we are pleased with that, and it’s very much an intentional decision as José mentioned. We made the choice to drop our demand generation spend to really lean in on efficiencies and be nimble as to where we invest to drive those efficiencies. So the U.S. is a case in point we dropped by 20%. But we didn’t see that commensurate drop in sales. And I think, to give you a little bit of background around this. This is really the result of a long-term strategy. It’s been 15 years of investment in marketing tech to really be able to hone-in on efficiencies, we continue to find new ways of driving sort of profitability through profit multipliers, looking at sort of audience targeting looking at drilling down to sort of profitability at the product level.

It’s also a result of an investment over the years. I’ve talked a lot about investment in brand building, which shows up over time, diversification of channels as well. I’ve talked in the past about app being a channel that whilst it’s a more expensive channel to acquire customers, it has very strong long-term value. So this is a long-term effort, I’m pleased to say that both and CPRO are down. But I think the story here is, one that we’ve mentioned before is really about retention and engagement. I mentioned this at the Capital Markets Day, we’ve acquired a very large, broad base and very valuable luxury customer. We continue to grow that base 500,000 customers this quarter, but we’re really continuing to engage on retaining that broad and large customer base, and we have a very strong strategy around retention, personalization, some of the developments that as José talked about in AI will only accelerate that.

But for example, this quarter we talked about, we launched Farfetch for you, which is already showing some really, really promising results in terms of curating the marketplace, one-on-one, personalized communications, and have a 90% higher conversion rate and we keep driving those up year-on-year. And so we’re really becoming more and more surgical about all of the factors that drive retention. And as we invest on that side of the business, we’re actually expanding it to really the end-to-end customer experience. So I think retention is a big part of this strategy. And to your question about, what should we expect in terms of that leverage? Through the end of the year, we’ve always said that we manage our demand generation to a framework around payback, and we are back to the sort of under six month payback.

We will continue to manage it that way, lean into markets, where we’re seeing really good payback and pull out of markets where we’re not, but I think you should expect to see around 7% to 7.5% of GMV in terms of demand generation spent.

Operator: Our next question comes from Lauren Schenk from Morgan Stanley. Lauren, feel free to unmute.

Lauren Schenk: I just wanted to dig in a little bit more into the second quarter outlook just given all the moving pieces anniversary in Russia, Reebok, Ferragamo, it sounds like you’re expecting all geographies will deliver sequential improvement but just given some of the new partnerships anyway, to sort of think about the magnitude of GMV improvement in the second quarter. And then just wanted to reconfirm that on the full year guide, you’re still expecting about 500 million on the year from all the new deals together. Thanks so much.

Elliot Jordan: Hi, Lauren, good to speak to you. It’s Elliot here. Look, I think you saw on the sort of the shape of the year slide, absolutely see the year, continuing to pan out, as we predicted, back when we provide a full year guidance. Obviously, the key goal here is for us to deliver the $4.9 billion of GMV that’s the expectation for this year. And with Q1 slightly ahead of where we thought we would land because of the — very focused execution on delivering what the customer needs in this current environment. We remain very confident that the 4.9 billion is the right place to be. And yes, in terms of incremental value from clients, we absolutely seeing that sort of $500 million number is the GMV that will come through from the new clients that will launch on FPS, and obviously, Reebok which has now gone live.

So obviously, a key part of the growth of 4.9 billion is with the new clients. But underlying, we’re obviously you’re going to be achieving high- single-digit, perhaps 10% sort of underlying like-for-like growth across the business to achieve the numbers for the full year and remain very confident that that is the profile. In terms of Q2, I don’t want to be drawn too much on exactly where we will land. But obviously, back to growth in Q1, we will see that expand as we trade into Q2. I think the GMV number will still be a single-digit year-on-year growth. So I don’t want people to get too excited at just the stage. Obviously, we will focus on as much as we can, with the new clients that have gone live. But I think single digit year-on-year growth is probably the right thing to be focusing on for Q2.

Operator: Our next question comes from Geoff De Mendez from Bank of America Merrill Lynch.

Geoff De Mendez: I just wanted to come back on the guidance for this year. On the underlying basis, I think Elliot you just mentioned that the guidance for this year was between 8% and 10%. But I think initially, when you guided for these numbers, you had in mind that China would only come back to growth in the second half of the year, and you didn’t really have a clear view on where the U.S. would be in 2023. And then today, you’re now saying that China is already back to positive in Q2 to date. And if I understood correctly, you’re also saying that the U.S. should be up in the second half of the year. So does that mean that you’re thinking that the underlying growth could be faster than the initial guidance? Or is it not — if not, then what the offsetting factor here?

Elliot Jordan: Hi, Geoff. Great speaking with you. Look, I think, again, I’ll say we obviously achieved in Q1, exactly what we sort of set out to achieve, get the business back on track focus very much on cost, delivering an improvement on our cash position, year-on-year. And maintain the healthy margins that we’ve been delivering, as well as I suppose slightly better than expected performance in terms of GMV growth. We’ve got a really good plan for the rest of the year, we’ve got a fantastic position on inventory from third party clients. You’ll have noticed from other report their inventory levels there up significantly year-on-year, and the comp headwinds will start to reduce, which is also very positive in terms of reported numbers as we start to move through Q2 and beyond.

But I think there’s plenty to navigate. So we don’t want to get ahead of ourselves in terms of where numbers may or may not be versus that original plan, I think the plan of underlying eight to 10% is still the right plan, in terms of by geography, we are seeing China back to growth, absolutely Q2, that will pick up across the rest of the year, we obviously are still expecting a moderate ramp back up the Q, sorry, the numbers for this year for China will be lower than 2021. So we aren’t seeing a full recovery back to 2021 levels in our expectations for China. But we are obviously seeing growth from the rest of the year now as we move forward. On the U.S., obviously, we are seeing a better position from where we were in Q4. And I think that will improve as we trade through Q2, whether that will get to positive territory in the U.S. is yet to be seen.

So I think second half growth for U.S. is probably what you should have in your numbers. And that obviously, will allow us to deliver this 8% to 10% underlying. I think broadly, that’s the focus for us. We’ll trade all markets as best we can. But we don’t want to get too ahead of ourselves in terms of numbers right at the stage.

Operator: Our next question comes from Irwin Boruchow from Wells Fargo.

Irwin Boruchow: Elliott, maybe for you. When we look at the inventory in the balance sheet in the 1P business, can you talk about the quality of inventory you’re sitting on now, what your expectations are on the inventory line as we as we get through the year. And then to that point, the 1P penetration and 1P gross margin, I assume that directionally those should be improving as we move through the year. But can you give more context behind that maybe some more specific numbers about what we should be expecting there?

Elliot Jordan: Hi, Irwin. Yes, great questions. Like we’ve done a superb job actually, in Q1 sort of churning through excess inventory balances that we’ve been carrying, between the end of the year and now, on an underlying basis, actually, the inventory levels have come down. It’s been sort of offset somewhat by Reebok inventory. That’s now come onto the balance sheet about $20 million to $25 million of Reebok inventory was added in the quarter. So underlying, we’ve seen a reduction in our inventory levels, that is clearing through old-dated stock, we’ve been able to use the sort of current environment of promotions across the industry to manage that stock through and very much focus on moving through the inventory balance that has caused the shift up in terms of share.

So, as I said earlier, the GMV is up to 22%. And the margins on the first-party business, therefore continue to be suppressed below 30%. Obviously, we’d much rather have our gross margins on 1P, in the 30s, which is sort of better historical numbers. Because of the fact that we were clearing older dated stock, we’ve been able to utilize some of the provisions that we have on against the stock position to be able to offset some of the margin pressure, which is why we’ve seen good 1P margins year-on-year. Obviously, as a team has been more aggressive on some of the older stock, it’s released those provisions. And also we’re seeing in Q2 to-date, the ability to continue to sort of move through inventory at slightly better margins than we were expecting.

So everything’s holding up quite nicely. But plenty of work to get through. My target for the end of the year is to have overall inventory back below $300 million. So we’ve got something like $50 million, $60 million of inventory at a net level that includes a net of any additions for Reebok through this year, so much higher than that number in terms of underlying inventory to clear, and we’re taking that focus through the next few quarters to get that number below $300 million by the end of the year. That will result in continued gross margins below 30% for the rest of the year. And it will mean that 1P as a mix of GMV will probably stay above 20% for the next few quarters. But our intention as we exit this year is to have inventory levels back under control as we go into 2024.

And then, the GMV mix will come back below 20% as we see 3P grow again and 1P will sort of moderate. So hopefully that paints a good picture of where we are very pleased to be working through it. And I think the other key aspect of this is, as we bring that inventory down from today’s balance of 346 million to below 300. Obviously, that turns back to cash. And this is where we’re seeing the opportunity to really improve our working capital position across the year by turning inventory balances back into cash, which obviously helps us get back to the 700 million plus number by the end of the year.

Operator: Our next question comes from Nick Jones from JMP Securities.

Nick Jones: In the press release, there’s comments about personalized communications, improving conversion rates, how should we kind of think about these efforts to generate more personalized communications, whether maybe — through some of the generative AI stuff you’re working on versus kind of a pullback in demand generation that you’ve made? And can these efforts kind of off that the pullback? Thanks.

José Neves: Hi, Nick. We have been laser focused for a few years now in terms of deploying artificial intelligence and machine learning algorithms to personalization. This is one of the vectors of growth and the opportunities we see in the marketplace. We have an absolutely unrivaled range. Many more brands and products from all around the world. And this is really a key USP for Farfetch, but personalizing that offer that vast offer to each single customer is a major opportunity for us. So we’re very, very happy with the results of that effort. Our in-house algorithms have beaten every single algorithm, we’ve tested in the industry on AV testing. And therefore, we now have full in-house recommendations engine rankings changing.

And obviously, these things get better and better as we go along. The conversion rate of personalized communications is almost double is 90% higher than then other communications. So you can see, the benefit that comes from . And to that extent, we’re very excited about the recent quantum leaps in terms of large language models and the AI that we’ve seen since the launch of ChatGPT. So we’re very excited about that. We think there are really powerful applications in the luxury industry. We think we’re better positioned than anyone else to capture those opportunities because, of course, it’s about these models and in that we have a long-term partnership with Microsoft. And we’ve been able to agree with them and in the spirit of their partnership and deepening of that partnership, to have access to the latest versions of ChatGPT.

But of course, it’s even more important the how rich your dataset is, and your knowledge base in terms of applying these models with a fantastic user experience for the luxury customer and for this industry. In those two elements, I think we win in space. We have a much — a very, very rich data set with transaction — global transactions visibility of both online and offline transactions, across 3500 brands, in 190 countries, over 1 billion visits per year, 4 million active customers. This is the scale in terms of data set and the richness of the data set, which is quite unrivaled in this industry. And when what we also apply our knowledge of the luxury industry, I think we’re in a very good position to have the best applications of ChatGPT for this industry, we’re actively now working on three proofs of concept and we believe that could drive the personalization effort even further, which has been very successful in the past.

And I think with quantum leap in these advancements in AI could really accelerate that even further. And not just that, I think there’s opportunity also on the increasing of the efficiency. And in terms of our operations, I think product descriptions, I think customer service and augmenting the quality and the speed of customer service, the impact that has on retention and customer satisfaction. In terms of image generation, we have acquired a , which is already proving to boost our efficiency in terms of our digital generation of images without using real models, but with the quality that a human eye cannot really differentiate between what is producing in terms of quality. And that’s leveraging advanced technologies and AI. And I think with these new advancements that we’ve seen in the space, we will be able to also apply those to what has already been very successful.

So yes, we’re very, very excited about personalization and continuing to elevate the luxury customer experience.

Operator: Our next question comes from Blake Anderson from Jefferies. Blake, feel free to unmute.

Blake Anderson: Hi, guys, thanks for taking our question. I wanted to ask on the customer growth in the U.S., you said that was up high-single digits. I was wondering the mix of that in terms of maybe a higher end customer versus more of an aspirational one in terms of income level? And then in a more normalized environment. What do you feel like that customer growth could be if you weren’t discounting lower than peers? Thank you.

Stephanie Phair: Hi, Blake. Stephanie, here. So yes, we’ve talked about the U.S. specifically. And yes, well, it is an uncertain economic environment. And we’ve seen those reports, certainly in, other calls, we are pleased to see that we’ve seen order growth, active customer growth, and we’ve seen an acceleration quarter-on-quarter. And I think a large part of that is coming from our customer growth. And where that is not translating into sales has more to do with AOV. So it really is around our strategy to continue to grow customers and retain the large customer base we have. I talked about it earlier, the long-term efforts we’ve had in brand building in the U.S., we’ve invested quite a lot. There are efforts around efficiency to really acquire the right kinds of customers.

I think in terms of the difference between aspirational and private client, I think we need to take a step back and actually think about how we are positioned as a business as a marketplace to really cater to both of those. And I think this is very unique to Farfetch and also positions us extremely well to navigate these very questions that you have around the markets and what kind of customer. Farfetch has the broadest range of supply in the industry, which means that we can cater to a very broad range of customers. So we can cater to the aspirational customer who wants to come in, at a bronze level is what we call them in our access program. And through our efforts over time, we start to build share of wallet and move them up. But we are also catered to a very high-end customer, the private client customer.

And we’ve actually seen acceleration of that private client customer moving up tiers from gold to platinum and into private clients. So I think what Farfetch does in a way is very actively reflect the way the industry operates. If you look at the way some of the largest brands in the world, run their businesses. They talk about the high-end. They talk about the private client, but their sales come from a very broad base of product. So they cater to the aspirational customer with small accessories, shoes, smaller bags, and then, of course, they catered to the very high end. And that’s where we are very, very well positioned at this time to navigate both geographically but within markets. So we can cater to both different price points, and different trends and customer preferences.

Operator: We have time for one more question. Our final question will come from Marvin Fong from BTIG.

Marvin Fong: I guess I like to just kind of focus on Europe. We haven’t talked much about it. But it seems to be I think you said it was up low double digits is just curious. Is that more of a function of easy compares? Or is the geography performing better than you expected? And maybe just a quick housekeeping question, Elliot. Could you speak to the gross adds in the quarter? Was it 400,000 or better in the quarter as it has been in past quarters, or there we see some pullback there, in line with your lower demand generation expense? Thank you.

José Neves: Yes. I think over the last 15 years, we really invested a lot in terms of having a truly global footprint and capabilities, is one of our company values is think global. We believe this is a global industry, we believe that brands have the absolute imperative needs to appeal to the key luxury markets around the world. And this is a global luxury customer base. So over the last 15 years we’ve invested in a very robust operations and logistics platform. So we’re able to collect product from 50 different countries and deliver to over 190, that logistics capability combined with the technology we’ve developed were in 15 languages, providing customer service, providing payments in different jurisdictions, different countries.

So it’s a truly localized experience. And that’s what’s driving the growth and the growth in Europe is coming predominantly from Southern Europe. So we’re seeing very good results in Italy, in France, in Spain. And this is because we have these languages, we’ve had these languages for a few years, this is an investment we’ve made in our payment systems, logistics and also marketing tech, the ability to really operate at global scale and move the demand generation dollars to where they are more efficient. In fact, on a three-year stack, we’ve grown this markets over 100% including the Middle East. So yes, very happy that that our investment in building a global platform is really materializing into strong growth in other geographies, and we think this is a competitive advantage and a strong mode.

It’s an investment we’ve already made. So now we’re ready to leverage this strong investments. And this is something our brands tell us. That is, when added reason why they very much want to be on our platform. You saw the growth in our top 20 brands in terms of supply made available to the Farfetch platform is staggering at 60% year-on-year. And this is because we bring them an incremental, very high value luxury customer in all these geographies.

Elliot Jordan: And Marvin, I’ll just finish up on the gross adds. I think we’ve seen before, it’s around 500,000 in the quarter in terms of new customers acquired.

Operator: With that, we will conclude our call today. Thank you all for joining us. We look forward to updating you on our progress next quarter.